1. Risk Management in Foreign
Exchange
Name- Gauri Srivastava
Roll Number- 11
2. INTRODUCTION
Foreign Exchange-
The exchange of one currency for another, or the
conversion of one currency into another currency. Foreign
exchange also refers to the global market where currencies
are traded virtually around-the-clock.
It works 24 hours a day except weekends.
The daily share of Indian Currency in global exchange
market is 0.9%.
In India we have direct exchange rate system.
3. Research Methodology
• Objective-
• To get the knowledge about the hedging tools used in
foreign exchange.
• To know about the various concept and technicalities
in foreign exchange.
4. Exchange Rate System
The Gold Standard
Bretton Wood System
Floating Rate System
Prchasing Power Parity
Methods Of Quoting Rate-
Direct method
In direct method
5. Risk Involved
Cash inflows and outflows, as measured in home
currency equivalents, associated with foreign
operations can be adversely affected.
• Revenues (profits) and Costs
Settlement value of foreign currency
denominated contracts, in home currency
equivalents, can be adversely affected.
• For Example: Loans in foreign currencies.
The global competitive position of the firm can be
affected by adverse changes in exchange rates.
• Influence on required return.
6. HEDGING TOOLS
• FORWARD CONTRACT
– Forward points/ forward differential
– Farward rate = Spot rate + Premium/ - Discount
• Risk in forward differential
– Premium
when currency is costlier in future than spot
– Discount
when currency is cheaper in future than Spot
7. HEDGING TOOLS
• OPTION CONTRACT
– Call option
– Put option
– American option
– European option
• Strike price
• IN, OUT, AT the money
– In the money
– Out the money
– At the money
8. CONCLUSION
• According to the Bank for International Settlements as of April
2010, average daily turnover in global foreign exchange markets is
estimated at $3.98 trillion
The $3.98 trillion break-down is as follows:
$1.490 trillion in spot transactions
$475 billion in outright forwards
$1.765 trillion in foreign exchange swaps
$43 billion currency swaps
$207 billion in options and other products
• Forex trading is very profitable and also can be very risky, but there are
various foreign exchange risk management strategies, that can be used to
limit risk and financial exposure.